Surviving The Assault on Private Sector Careers in America

This Jobless Recovery is Real!

DJH: As unemployment hits 22%, there is a strong recovery underway. There is just one problem — it’s not going to generate many new private sector jobs!

The Jobless Recovery?

Ina recent piece I did called “What is the Real Unemployment Rate: Would You Believe 22%?”, I highlighted a small business owner who reported that Obamacare has increased his cost of labor by $5/hour and when combined with the repeal of the Bush tax cuts, his income taxes will jump by 30% on January 1, 2011.

His response — stop hiring and focus on making the most he can with what he has.

Many are wondering whether the bull market is back on or this is just a bear market rally. I believe we could be at another quality buying opportunity, not nearly the extreme of 2009, but a great chance to pick up stocks on a 10% discount. Below are my five reasons for being bullish:

1. Europe learned from the US crisis and made all the right moves.

The world has been in a rolling credit crisis for three years now. The deflationary collapse struck in the United States first causing an incredible drop in asset prices in late 2008. The government was fairly quick to respond to the massive demand-side slump. In fact, the government intervention was accomplished much earlier along in comparison to the Great Depression largely accounting for why another depression was avoided.

The $700 billion Troubled Asset Relief Program (TARP) achieved major feats in restoring confidence in the banking system. Re-capitalizing major financial firms was the first step in stabilizing the collapsing equity markets and frozen credit markets.

European markets started to fall in mid-April as sovereign debt fears hit front page and calls for the complete collapse in the euro monetary union were abound as the euro was dropping from highs of over $1.50 to cracking $1.20 on the downside. The EU responded even more quickly than the US did with the TARP program. The playbook had already been written by the US, the EU borrowed the best plays and put them into action earlier and more effectively. The EU announced a debt aid package for €700 billion that quickly halted the euro’s decline.

2. Second-quarter earnings reports have been great & the sentiment pendulum has swung positive.

The chief concern this earnings season was weakness on the top line. Analysts have been arguing for months that while cost-cutting is great and improves the bottom line, sustainable growth in earnings will only come from top line growth. Bespoke has a great chart out showing that these fears have not been realized so far. As of Wednesday 73% of companies have beat expectations on their revenue numbers, far better than the historical 62% average. While earnings reporting is inherently backward-looking, it is clear that analysts continue to underestimate this recovery.

In week one of earnings season, on Tuesday night Intel (Nasdaq: INTC) reported an absolutely astounding quarter amazing the Street by exceeding top and bottom line estimates on higher margins and aggressively raising guidance. INTC reported EPS of $0.51 versus $0.43 expected and revenues of $10.8 billion versus $10.3 billion expected. Gross margins expanded year-over-year from 51% to 67% for the second quarter 2010! INTC topped it off by raising Q3 revenue guidance well above $10.9 billion estimate to $11.6 billion. Second quarter 2010 was Intel’s “best quarter in the company’s 42-year history”.

The change in sentiment is quite drastic. The pendulum has swung to the positive side as even a very disappointing report was confidently bought, that response coming in stark contrast to the selling seen after the absolutely steller INTC report the previous week.

3. The leaders to the downside have stabilized, GS & BP.

The SEC investigation into Goldman Sachs (NYSE: GS) in mid-April marked the first significant drop in a leader of the market. Over the ensuing months shares of GS dropped from $185 to below $130 by the beginning of July. The hearings, speculations, rumors all worked as an overhang to shares for months and acted as a major drag on the equity market. The Deepwater Horizon rig explosion on April 20th was another blow to the market. Shares of BP (NYSE: BP) melted from over $60 to well below $30 by late June. The oil spill pulled down many others in the oil sector, particularly Halliburton (NYSE: HAL), Cameron (NYSE: CAM), Transocean (NYSE: RIG) and Anadarko (NYSE: APC), among others.

Now, the SEC has settled with GS for a minor $550 million fine. In a broader context, the uncertainty over financial reform is behind us as Congress finally passed the financial reform bill. Shares of GS are on the rebound back up to the $150 area now. BP finally managed to stop the leak in the Gulf quelling fears of an unstoppable disaster, bankruptcy, etc. Shares of BP are now over $10 off the lows and the cleanup is well underway.

4. The first higher low is in place confirming buying interest.

For the first time in this market correction, there is a convincing higher low in place on the charts. After a series of three lower lows, buyers have stepped in to buy at higher prices. Along with the higher low, the close on Friday amounts to the first higher high and takes out the descending trendline. While the break of a trendline is not inherently bullish, it does signal a significant change in the rate of decline. The cocktail napkin technicals point to an encouraging change in previous trend.

5. Doctor Copper is forecasting a strengthening economy.

What is Doctor Copper saying? A reading of the technical tea leaves in both copper and crude oil offers compelling evidence for the bullish argument. Something has clearly changed in the dynamics of copper. Once again, similar to equity markets copper had its first higher low put in and this past week achieved its first higher high. In just this last week, copper rallied 8.9% from below $3 to challenge the $3.20 level. It may take a few days but recouping the $3.20 level will be final confirmation of this rally.

Crude oil is also showing signs of increasing demand. After breaking down below $70 per barrel in late May, crude prices have rebounded and are now bumping up against the $80 resistance level. Oil also has a higher low in place on the charts.

America is Well Staged For a Jobs Recovery

The cash reserves and conservative fiscal management polices being followed by most US private sector firms essentially means “their powder is dry” and they are very well positioned to expand when the see fit. And that’s the rub for Obama; they’ll expand when they see fit, not when Obama wants them too do so!

I suppose it might be possible for Obama to make 180 degree turn and transform himself into a pro-business, small government, tax cutting leader. It’s also possible that aliens might land in Times Square and teach us how to generate electricity from dirt! I don’t see either of these happening anytime soon.

What’s more likely (I hope and pray), is that enough fiscal conservatives get elected in November to effectively shut down Washington DC. Unfortunately, Obama’s big anti-business bills: Obamacare and the massive Financial regulation bill cannot be repealed until 2013 (once Obama is out of office). But a federal spending shutdown might be enough to get businesses off the sideline and start hiring again. In the meantime, perhaps our portfolios will keep getting better — one can only hope!